Monday, April 15, 2013

Earlier this year Endeavor Insight, the research arm of Endeavor, cited evidence indicating that when faced with tradeoffs between social and financial goals, entrepreneurs who lead social enterprises should prioritize financial goals. Linda Rottenberg, CEO of Endeavor,posting on the Harvard Business Review, came to some pretty punchy conclusions. “If you want to scale impact,” the headline booms, “put financial results first…[and] when tradeoffs must be made, prioritize financial goals over social ones to maximize the long-term sustainability of the business.”

This is such an important question, perhaps the most important question facing the impact investing space, and I’d suggest we need be wary of such broad conclusions. As a sector we still have so much to learn about how we define, create and scale social impact.

There is little denying that in order to achieve sustainability and growth a company must have sound finances – without that, they won’t be around to serve their customers. And so the logic seems clear: efficiency is key to having a strong company; having a strong company is key to greater scale, and scale is key to impact. Or, on the flip side, a company that’s bankrupt won’t have long-term social return.

But that financial sustainability is critical does not mean ipso facto that prioritizing it when there are tradeoffs is always right. Just because financial goals are good for long-term sustainability does not mean the converse holds i.e. that prioritizing social goals will undermine impact.

Specifically the conclusion that I have most difficultly with is that “those who prioritized financial goals over social goals were much more likely to experience high rates of growth and have greater social impact.” It is a pretty bullish ‘and.’

The whole question hinges on one’s definition of impact. If impact equates to scale, say jobs created, then it is little surprise that you’d find financially well-run businesses deliver bigger impact. The assessment is biased by using a narrow, output-based metric as your sole barometer for impact, one for which financial discipline will have a high degree of causality. It is an illusionist’s trick of sorts: finance equals scale, scale equals impact, and hey, presto, finance equals scaled impact.

Before going on I’d like to be clear that using operational scale metrics as output indicators of impact is no bad thing, and Endeavor themselves list some pretty interesting metrics on theirimpact dashboard. This is a good approach and is widely available to the industry. Indeed it is exactly what Acumen Fund does. We have been a field-builder in this approach and are proud of that work. For instance, Acumen played a central role in establishing the Impact Reporting and Investment Standards (IRIS), we helped found the Aspen Network for Development Entrepreneurs (ANDE) and the Global Impact Investing Initiative Network (GIIN), and, in partnership with Google and Salesforce, we created the PULSE software platform for metrics collection. Acumen has been using Pulse to collect IRIS metrics across our global portfolio for the last five years, and as of last month more than 94% of Acumen’s active investments submitted monthly performance metrics. Some achievement. (I say this unabashedly since all these achievements came before I joined Acumen earlier this year).

However, it is important to acknowledge that there are limits to what we can know about impact using techniques dominated by data on outputs, and I think we should still be modest in our conclusion. Output-based, scale-based metrics are an outstanding way to give confidence about whether one is having impact. But when one wants to get to conclusions about what are the best ways to maximize impact, and where there are and aren’t tradeoffs, we need a less blunt instrument. Outputs are, after all, only proxies for impact. It is only when they are coupled with high-quality research on the linkages between the output and the outcome that one can have higher confidence about what social impact has been made and why. We have been clear in articulating our position on this, for instance in the Stanford Social Innovation Review article highlighting both the strengths and weaknesses of the approaches we have championed; and avoiding leading to sweeping conclusions, especially when there is still much to discover about the art of the possible in terms of how we measure and maximize social impact.

Consider, for example, an entrepreneur managing their business well enough to stay in business and be cashflow positive. Imagine further that this entrepreneur is focused not just on market penetration but on the depth of the impact of each and every product sold. Might they not deliver greater aggregate social impact, even in cases where that comes at the cost of maximizing growth? For example their prioritization of social impact might mean providing or facilitating access to other complementary services – not necessarily core to their business – that help maximize the overall impact they make (and, incidentally, grant funders might themselves be interested in supporting delivery of these services); they might treat the people that work for them, as well as their customers, with dignity and respect potentially trading off some efficiency for greater equity or long-term customer loyalty; and they might go to great lengths to fully understand their impact and tweak the product over time to maximize impact – as opposed to scaling a product that is beneficial to the poor but could be made even more so with financing or subsidy or ancillary services.

It is also worth asking what the conclusions reached by Endeavor would mean for an entrepreneur’s decision-making when faced with marketing decisions to target the extreme poor. My suspicion is that a financially maximizing social enterprise would, for example, prioritize going to scale serving those just above the poverty line in Zambia rather than those below it in DR Congo. But the poorest will almost certainly have a higher marginal return from the use of any given product – a first solar lantern certainly means more to poorer family with no reliable energy than one or two solar lanterns would mean for a relatively wealthier household with some access to the electrical grid. Surely this is higher social impact, and might come at the expense of scale or financial maximization. The tricky part is walking this fine line while ensuring that you are building a company that will be there to serve its customers in the long-run.

When considering the conclusions reached by Endeavor, I worry that there are parallels to the kind of analysis that may have adversely affected the microfinance industry. For a time, presumed wisdom suggested you need only to look at repayment rates of MFI’s (akin to looking at financial performance or scale) and you would be sure that all the developmental good stuff was happening. A few years on and that notion is being challenged, and worse still, evidence suggesting we perhaps know less than we ought to about the pro-poor impact of microfinance and that microlending may in some instances have increased rather than decreased poverty. In that context Grameen Foundation’s Progress out of Poverty Index has emerged as an ingenious tool to help the industry check that they were reaching the people it originally intended and widely purported to reach. Some of its early application has shown surprising data that MFI’s weren’t having the social impact they had thought or hoped.

It is great to see Endeavor asking such questions, and one day we might indeed conclude that they were right. I’d welcome such a day, since that would make the job of maximizing impact a more straightforward task: a singular maximization problem with finance at his heart. My hunch is that the challenge is far more complex, especially when we start considering some of the knottier social issues such as the value of dignity and empowerment, or even when we stop to consider that who you serve is almost as important as the service you deliver in determining impact.

In our work at Acumen, we are pleased with how far we have come, but we remain committed to doing more to understand the depth as well as the breadth of our impact. This is hard work, but with initiatives such as a recent Randomized Control Trial we’ve kicked off to better measure the impact of Western Seed hybrid seeds, and by piloting improved capture of income data for our customers using mobile phones, we are experimenting with new techniques that will allow us to continue to build on our work to understand impact.